SMM: (ed.11) The ESG Solution

The environment is precious, resources are scarce, and we are compelled to sustain this beautiful planet for future generations. Bitcoin’s detractors single out bitcoin mining as regressive and environmentally damaging, which catches the eyes of the increasingly powerful ESG and green movements. But this approach reveals a gross misunderstanding of the technology. This month’s article delves into these nuances and serves as an overdue follow-up to “central banking is an environmental disaster.” TLDR: Contrary to popular opinion, bitcoin improves energy efficiency and promotes conservation. I believe it will create more ESG conscious investment portfolios through providing digital sound money to millions, promoting renewable investments and curtailing debt-fueled consumption (ESG: Environmental, Social and Governance).

Source: Ark & Square

Problem: Bitcoin’s transparency encourages criticism

Bitcoin’s public ledger creates an observable record of the computer processing power securing the network. This is unlike any other technology, business, or industry. For example, we do not know how much processing power is being consumed by banking, insurance, or payments processors. We do not know how much power Google, Facebook or Amazon’s data centres consume.

There are approximately 160mn terra hashes per second worth of processing power allocated to the network.

Bitcoin processing power has increased exponentially since CPU mining in 2010, which is a good thing!

Decentralised digital transfer needs a secure foundation

The higher the hashing power, the more secure the network. The cost of co-opting 51% of bitcoin’s hashing power is prohibitive. No single entity can attack the network and persistently double-spend transactions. It is imperative that I decentralised digital currency is secure. In contrast to bitcoin, smaller blockchains or cryptocurrencies with less hashing power are susceptible and insecure.

Since hashing power is observable, electricity usage and cost can be estimated. These estimates lead observers like the BBC to conclude, “bitcoin uses the same electricity as Switzerland!” These headlines are eye-catching and environmentally conscious people are understandably concerned. But the data is often misleading.

Complication: Estimates are inaccurate

1) Equipment variability
Efficiency of mining equipment varies depending on the make, model and service history. So, the electricity usage estimates are inherently unstable.

2) Electricity variability
Electricity costs are specific to the miner and miners are profit maximizing. They gravitate towards the lowest cost electricity. While average electricity rates can be estimated, costs will vary within the same city depending on location, time of day and day of week. Think about off-peak vs. on-peak prices or variable contracts depending on residential vs. commercial usage.

3) Energy is non-fungible
Electricity provision is a challenge of transportation, storage and matching as much generation. Electricity does not travel or store well. It is only valuable if it can be consumed timeously. There are vast quantities of electricity that cannot consumed timeously. Sometimes electricity is generated at the wrong time of day, the wrong day, the wrong location, or the wrong season. The world ‘wastes’ lots of electricity!

Resolution: Miners consume waste electricity

Since bitcoin miners gravitate towards low-cost electricity, they gravitate to waste-electricity by default. Miners rarely compete with electricity consumers in cities at times when power is at a premium. It is not profitable.

If a consumer can access cheap power in a city (most likely due to a favourable regulatory relationship), and this consumer decides to abuse the relationship through bitcoin mining, authorities quickly notice that power is being drained out of the grid and they terminate the relationship. There was an amusing recent example of this in the UK.

Miners support renewable investment

Often the biggest “wasters” of electricity are renewable energy sources like hydro-electric dams because these sources are trickier to turn on/off. Bitcoin miners gravitate towards these sources. For example, geothermal in Greenland or hydroelectric in China.

Bitcoin miners have emerged at natural gas wells in North America, solving environmental problems. Rather than flaring gas into the atmosphere, this energy is syphoned into generators to produce bitcoin. In this sense, bitcoin is being used as a battery to store waste electricity for usage later. This could be the first time in history that a battery exists to convert cheap energy into a tradeable asset that holds value across time and space.

Time will tell but this could have a profound impact on the energy industry, allowing producers in far-flung regions of the world an opportunity to harness clean energy sources. Ark and Square argue that this will lead to renewable energy investment because producers can now guarantee a more consistent customer (miners) when standard consumers are off-line. Estimates suggest renewables are an elevated share of bitcoin’s energy mix.

Bitcoin consumes waste energy. It is a battery technology for energy producers to harness renewables.

This is pretty darn exciting if you ask me, but it is not all.

Bitcoin could conserve the environment

As bitcoin succeeds it reduces the need for banks, financial services, and central banks. Imagine the energy we would conserve if we no longer needed ATMs on every street corner, banking headquarters in every large city and conferences, flights, and bonuses. Do you think it might be good for the environment if we did away with those? Portfolio Insider estimates that bitcoin uses less than 10% of the traditional banking industry. (Another estimate, but it provides an interesting picture)

Comparing energy expenditure
Source: Portfolio Insider

Bitcoin could disrupt legacy companies, remove middlemen and reduce financial service providers, conserving energy.


Central banking is an environmental disaster

(this is the topic of SMM ed. 5)

The monetary excesses promoted by monetary and fiscal profligacy encourage households and businesses to consume in the hope of stimulating economic activity. In a world of constrained resources, what is environmental damage if it is not consuming more than we can afford? We are constantly persuaded to live beyond our means, leverage up and buy the latest car, slickest fashion, or fancy gadget. What do you think this does to the environment?

Excessive consumption diminishes scarce resources and negatively impacts the environment.

I am not suggesting we all live in the countryside and eat gruel. People are welcome to consume. But we have a mechanism at the heart of the modern economy, which specifically damages the environment. Debt fueled consumption is a key reason we waste so egregiously.

Unsound monetary and fiscal policies are the key cause of environmental damage and bitcoin gets directly to the heart of this problem. Bitcoin inserts sound money principles into millions of families around the world. Sound money encourages savings over consumption, delayed gratification, long-term thinking, and conservation of resources. These principles will have a profound impact on the environment.

Implications

  1. Bitcoin’s energy consumption will likely remain a problem for bitcoin’s detractors as they look for any sign of weakness but this merely displays their lack of understanding of the technology and energy industry.
  2. Truth be told, bitcoin is the solution to the ESG conundrum. Rather than try to insert ESG compliance on each investment within a portfolio, bitcoin provides a top-down strategy. I expect that it will be a much more effective solution because it gets at the heart of environmental degradation, unsound money.
  3. The more energy bitcoin consumes, the higher the security, the greater the network value to millions. Detractors completely under-appreciate the social consequences of an inclusive, decentralized, digital store of value.
  4. Bitcoin hoovers up waste electricity, providing an incentive for renewable energy investment.
  5. Bitcoin curtails debt-fueled consumption, the biggest driver of environmental degradation.

Further reading

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